7.5 economic change

exchange rates def

the price of one currency expressed in terms of another

influences on exchange rates

determined by the supply and demand of the currency

• If there is a high demand for a currency, the pound will become stronger against other currencies and the price of the pound will go up

• If demand for a currency goes down, so does the price and it becomes weaker

• If supply for currency increases the currency will weaken

• If supply of the currency decreases, the currency will strengthen.

SPICED

strong

pound

imports

cheap

exports

dear

how do businesses manage the risk of exchange rate

• buy large amounts of currency in advance - no risk attached to fluctuations in the exchange rates

• suppliers to set the price in their own currency

• locate in the country the business would originally export to

exchange rates and price elasticity of demand

• the more price elastic a product is, the more a business will try to minimise the effect of exchange rate fluctuations

• with inelastic products, business may allow the prices to change a bit more with the exchange rate, as demand for product won’t change much

GDP

• total value of a countries goods and services produced in a year

• real GDP takes inflation into account

economic recession

• GDP fall for 6 months

• growing but at a slower rate

• demand falls

• unemployment rises

• firms shut down

• low confidence

functional decisions in a recession

• reduce production

• reduce prices of elastic products

• job losses / cut hours to reduce costs

strategic decisions in a recession

• diversify

• change markets

• relocate

• outsource

boom

• high levels of growth

• high demand

• low unemployment

• inflationary pressure

• labour skills shortage

• high confidence

• capital investment is high

strategic decisions in a boom

• enter new markets

• increase long run capacity

functional decisions in a boom

• increases prices

• increase wages to retain staff

slump

• economics decline

• low or negative growth

• demand + inflation are lower

• unemployment tis rising

• confidence is low

• more monopolies and oligopolies as firms go out of business

strategic decisions in a slump

• negotiate better deals with suppliers

• add new products or services

• explore new customer markets

• create extra income streams

• keep existing customers happy

• improve customer service

• adjust pricing to stay competitive

functional decisions in a slump

• reduce production

• reduce prices

• improve efficiency and reduce waste

recovery

• rising economic growth

• increasing demand

• falling unemployment

• inflation rises

• higher confidence

• capital investment increases

strategic decisions in a recovery

• increase existing capacity

• start hiring again

• invest

functional decisions in a recovery

• capacity utilisation increases

• prices increase

inflation

• sustained increase in the general price level

• calculated by the consumer price index (basket of goods)

demand pull inflation

inflation caused by too much demand for goods and services causing producers to raise prices

cost push inflation

• an increase in business costs mean business put prices up to keep the same profit margin/profit

• consumers can buy less with their money

• workers demand and receive raises

• business costs increase again

• prices go up again - wage price spiral

effects of inflation on business

• increased cost of supplies

• consumers spend less

• large fall in demand for premium elastic goods

• less exports

• lower profits

• reduction in investment

• real value of debt falls

why does the government like inflation

• annual target of 2%

• low and stable inflation encourages inflation

• if workers receive pay rises it may motivate them

deflation

sustained decrease in the general price level

impact of deflation

• costs fall

• customers put off certain purchases hoping for further lower prices

• real value of business debt increases

• confidence and saving

WIPIDEC

• weak

• pound

• imports

• dear

• exports cheap

monetary policy

• use of interest rates and money supply (quantitative easing) to manage the economy

• interest rates are the cost of borrowing and he reward for saving

lower interest rates

• reduce incentive to save

• lower interest paid back on loans

• reduce costs for businesses

• could give people more disposable income - encourage spending rather then saving

IR + ER

• if the UK raise IR over sees investors will convert their money into pounds and put their money in UK banks

  • hot money

  • money moving between countries searching for the best interest rates

expansionary monetary policy

• designed to boost consumer confidence and demand during a downturn / recession

• costs of loans falls

• consumer confidence increases

• disposable income rises

• business investment trises

IR rise

• MPC raises IR

• signals lighter monetary policy

• market interest rates increase

• cost of borrowing rises

• slowdown of housing market

• cause currency appreciation

• UK exports are more expensive overseas

contractionary monetary policy

• reduce consumer spending and demand during times of inflation

• cost of debt / loans rises

• confidence falls

• disposable incomes falls

• business investment falls

fiscal policy

• use of taxation and government expenditure to influence the economy

• indirect tax - on spendings

• direct tax - on incomes or profits

minimising tax

• tax avoidance - minimising tax legally

• tax evasion - illegal non payment

• transfer pricing - relocating a corporation head office to a low tax nation

the budget

• deficit = gov spending > income (tax revenue)

• surplus - gov spending < income

• balances - gov spending = receipts

protectionism - international trade

• the extent to which the government use controls to restrict the amount of imports entering a country

  • tariffs on imports

  • subsidies

  • quotas - limits on imports

globalisation

• increased integration and interdependence of national economies

• growth of free trade areas

• improvements in communication and transport

• growth of multinational companies

• improvements in technology

• increased mobility of labour

emerging economies

• developing countries that have potential to grow and develop in terms of productive capacity and market opportunities

• growth in their consumer spending

• growing markets for businesses

• increasingly less protectionism

open trade

• system where countries allow goods and services to move freely across borders with minimal restrictions such as tariffs or quotas

  benefits

  • access to larger markets

  • lower costs for consumers and businesses

  • more variety and quality of products

  • promotes economic growth and job creation

  challenges

  • local industries may struggle to compete

  • risk of job losses in vulnerable sectors

  • dependence on foreign suppliers

advantages of globalisation

• increases sales revenue from a larger market

• cheaper resources

• EOS

• developing different products in different markets

disadvantages of globalisation

• downward pressure on prices

• new producers

• increased need for investment

• threat of takeover